In this match-up, we explore some of the common differences between electing an S-Corp or creating a Limited Liability Company.
Prospective entrepreneurs have likely stumbled across many articles or YouTube videos discussing the differences between an S-Corp or an LLC. For those solo owners, it can be slightly difficult to determine the real benefit of either setup. In this month's Spearhead article, we highlight some key differences between these structures with hopes that you gain clarity on an ideal fit.
Tax Implications and Profit Distribution
With an LLC, entrepreneurs utilize pass-through taxation, allowing profits and losses to flow through to the members' individual tax returns, while electing S-Corp status changes your business into a separate tax entity, with the opportunity for owners to receive both a reasonable salary and distributions. Additionally, an S-Corp can lead to potential tax savings, although your business must strictly comply with regulatory and procedural requirements, such as maintaining detailed financial records, holding regular board meetings, and complying with payroll tax obligations.
"S corporations are responsible for tax on certain built-in gains and passive income at the entity level." – irs.gov.
Ownership & Management
Members of LLC's have the flexibility to decide between a member-managed or a manager-managed structure, where appointed managers run the daily operations of the company. Alternatively, S-Corp's introduce a more formalized structure, governed by shareholders, directors, and officers. Lastly, S-Corp's limit the number and type of shareholders in the hierarchy.
Shareholders' roles are distinct from that of directors and officers, defining clear responsibilities. While this structure adds a layer of formality, it also brings a defined framework for decision-making and corporate governance.
Decision on S-Corp vs. LLC...
It should be noted that an S-Corp is a tax classification, not a business entity, and many business owners should weigh the differences between S-Corps and LLC's carefully. If this is a decision you are considering, contact us to help analyze what option fits best for your business.
Comments